Working Thesis
Teresa Rokos
February 2019
Abstract
This thesis evaluates how the market power of insurers and hospitals in geographical sub-markets determines the prices insurers and hospitals negotiate for hospital care. I will examine to what extent the variation in prices is explained by variation in costs and quality versus variation in market power, which may play an important role in bilateral price negotiations for services. Using carrier-hospital specific prices for outpatient medical procedures from New Hampshire’s NH HealthCost website, I compare the estimated prices for the same services across the state, both between hospitals and within hospitals. The methodology for the collection of this data can be found here.
Introduction
Motivation
The U.S.’s expenditure on health care has grown rapidly over the last few decades and has outpaced that of many peer countries without significant returns to quality (e.g. OECD 2017; Etehad and Kim 2017; Reinhardt et al., 2004). A substantial body of research has determined that the biggest driver behind the U.S. health care expenditure is not greater utilization or social spending but quite simply higher prices (e.g. Anderson et al., 2003; Papanicolas et al., 2018). Given that the $3.3 trillion spent on health care annually (17.9% of GDP) (Centers for Disease Control and Prevention 2017) erodes the budgets of families and individuals, state and local governments, and the federal government, understanding the sources of variation in these prices is of tremendous import.
I choose to focus this paper on hospital prices because hospital care constitutes the largest component of U.S. health care spending at 32.4% ($1.0825 trillion) of national health expenditure (Centers for Disease Control and Prevention 2017) as shown in Figure 1, and a vast body of research has identified wide variation in private insurance reimbursements to hospitals for the same services and/or diagnoses citations. Cooper et al., 2015 finds that for the privately insured, only about half of the variation in expenditure is due to the quantity of care delivered while half is purely driven by price variation; for public programs like Medicare, 95% of the variation in expenditure is explained by variation in the quantity of care delivered. 
Given that the largest portion of Americans (49%) receive health care coverage from their employer through private insurance plans rather than through Medicare and Medicaid (Kaiser Family Foundation 2017), this price variation among private insurers may affect what many Americans pay out of pocket for their healthcare. Moreover, this prior research such as Cooper et al. 2015 finds that this variation persists even when costs and quality are held constant.
This paper is most closely related to Cooper et al. 2015, but differs in several key respects: first, this analysis will focus a set of price data for hospital care in New Hampshire, while Cooper et al. 2015 relies on HCCI data which is a national cross-section sample and relies on claims data from Aetna, Humana, and United Health. While the HCCI data is a rich set of data that is perhaps nationally representative in a broad sense, none of these insurers are major players in the New Hampshire market; secondly, this paper will devote more attention to insurers’ relative market power as well as the effects on the uninsured who have minimal market power; lastly, I also include an analysis of how the share of Medicare patients at a given hospital affects the prices that hospital negotiates with private insurers.
Theoretical Framework
In standard micro-economic theory, one learns that prices reflect supply and demand, where the supply curve is largely determined by each firm’s costs of production and market power and the demand curve determined by consumer preferences and budget constraints. Market power is largely a function of the number of other firms in the market, but a firm may also generate market power for itself through distiguishing it’s product from others, most commonly in the form of quality. When it’s product differs from others in the market, a firm can extract a certain mark-up from consumers who have a preference for that difference, and consumers often have a preference for higher quality. Thus, in a standard competitive market, one would expect prices to reflect production costs and product quality.
The market for health services (often provided through hospitals) is unique in that there are two components of demand: individuals and payers. Even this is somewhat of an oversimplification in the US market because many individuals are privately insured through their employer which contracts with a private insurer/payer. However, for the most part, insurers cover much of the costs of care citation and negotiate contracts with providers if they are private (Medicare and Medicaid set their prices at a regional level). This gives private payers some form of monopsony power as there are often only a few of them present in each market, and they can choose whether or not to include each provider in their network which affects the prices individuals face for care.
Thus, payers and providers engage in bilateral negotiations where both are price setters rather than price takers. I assume the following: both the provider and the payer want to maximize their profit margins per patient, even if the provider is a non-profit (Horwitz 2005), and the number of patients they serve. Providers want to receive higher prices for their services but also to be included in payers’ networks, as patients face lower out-of-pocket costs when going to providers in network. Payers want to pay lower prices for providers’ services to minimize their costs but also want to attract enrollees by including convenient providers in their network. Thus, this is the bargaining environment in which bilateral hospital-insurer contracts are negotiated and the work below examines the impact on prices.
Background on the New Hampshire Market
Health Insurance Coverage
New Hampshire is a small state (8,953 sqaure miles) with a population of 1.343 million (90.5% white) and median household income of $68,485 (Census Bureau 2017). The following pie charts depict the insurance status of New Hampshire residents in 2016 as well as the market share of major private insurers. According to the New Hampshire Insurance Department, a total of 543,900 members were enrolled in commercial market plans in 2017 in the state, and 81% received coverage through employer-sponsored insurance plans (11.0% Individual Market, 7.7% NH PAP, 12.6% Small Group, 19.8% Large Group Fully Insured, and 48.9% Large Group Self Insured).
New Hampshire has a total of 31 hospitals and 3,503 beds (New Hampshire Hospital Association 2018). According to the New Hampshire Hospital Association, 13 of these hospitals with 2,704 beds total are Prospective Payment Systems (PPS) Hospitals, which take prospective payments from Medicare; 13 hospitals with 301 beds total are Critical Access Hospitals (CAH), which serve rural populations and therefore are eligible to receive certain benefits from Medicare such as cost-based reimbursement for Medicare services (Rural Health Information Hub 2018); 5 hospitals with 498 beds total are Specialty Hospitals, which provide a specialized category of services (such as children’s hospitals, orthopedic hospitals, cancer hospitals, etc.). All of these hospitals can serve non-Medicare patients as well.
Location of New Hampshire Hospitals (from Google Maps data):
Price Variation in the New Hampshire Market
I first want to motivate this paper by demonstrating that large price variation exists in the New Hampshire market for hospital care and that little of the variation is explained by costs and quality.
The New Hampshire Hospital Association provides a list of the top outpatient CPT codes in 2016 at hospitals throughout the state, and the average costs associated with each. Current Procedural Terminology (CPT) codes provide a uniform language for coding medical procedures and services and are published and maintained by the American Medical Association (AMA). The New Hampshire Hospital Association lists the 82 most common outpatient CPT codes (out of several thousand). To provide a picture of the extent of variation in the prices for these services, I further narrow this list down to 10 of the most expensive services for which I can obtain data on private insurance payments and prices for uninsured individuals from NH HealthCost and Medicare payments from CMS.
The Medicare prices were constructed for the relevant procedures/CPT codes using data from the 2018 Physician Fee Schedule (PFS) Relative Value Files and the following formula:
2018FacilityPricingAmount = [(WorkRVU x WorkGPCI) + (FacilityPERVU x PEGPCI) + (MPRVU x MPGPCI)] x ConversionFactor
The 2018 Medicare Facility Pricing Amount is constructed for each CPT code (each procedure) at each hospital/facility from the 2018 Relative Value Files available through CMS. I then combine these Medicare prices with those available through NH Health Cost. For ten common procedures, I present the resulting boxplot distributions in Figure 2.1, which includes payments by the uninsured, private insurers, and Medicare, and in Figure 2.2, which only shows the payments made by private insurers. All price data presented reflect 2018 prices.
For the exact same service, hospitals are able to charge different payers vastly different amounts. Below are some visual examples from the data that illustrate this variation between the three major private payers in New Hampshire (Anthem - NH, CIGNA, and Harvard Pilgrim Health Care) for the exact same service at the exact same hospital.
Data Sources
Raw data from NH HealthCost
The primary source of data on hospital costs comes from NH HealthCost which provides insurer-hospital specific estimations of total costs (reimbursements) for a long list of outpatient services and procedures. I copy and pasted this information for particular medical procedures and services into Excel spreadsheets (one for each medical procedure/service). At first, I attempted to mimic the 8 selected services analyzed in Cooper et al. (2018) (Inpatient, Hip Replacement, Knee Replacement, Cesarean Section, Vaginal Delivery, PTCA, Colonoscopy, and Lower Limb MRI), but the website only had data for colonoscopies and MRIs. I therefore chose to first look at radiology services only as these types of services (CT scans, MRIs, X-rays) should be reasonably assumed to have constant costs and quality within the same hospital. This allowed me to construct a data set containing the estimated price for each procedure and each provider-insurer combination for which data was available.
The following boxplot depicts the various distributions of estimated prices for each private insurer. 
Statistical Analysis
Methodology
The goal of this analysis is to determine whether there is a statistical difference between the prices hospitals charge Anthem, Harvard Pilgrim, and CIGNA in New Hampshire. That is, for the same service at the same hospital, is one insurer consistently paying a higher amount than the other two?
I create dummy variables for each of the insurers and Medicare and a new variable (“percent_medicare”) which is the price as a percentage of what Medicare pays for the same procedure at the same hospital. The price Medicare pays for Blood Tests is $0 so I drop those observations from my data (from 6,329 to 6,002). With the remaining data, I regress the “percent_medicare” variable on each insurer dummy variable (with the Medicare dummy being excluded) and include procedure fixed effects and hospital fixed effects to isolate within-hospital variation of prices and therefore plausibly control for quality and costs.
The results are listed below and show that Anthem pays on average 162% of Medicare prices, Harvard Pilgrim pays 282%, and CIGNA pays 396%.
##
## =====================================================================================================
## Dependent variable:
## ---------------------------
## percent_medicare
## -----------------------------------------------------------------------------------------------------
## Anthem_NH 162.404***
## (53.686)
##
## CIGNA 395.953***
## (55.800)
##
## Harvard_Pilgrim_HC 282.188***
## (47.399)
##
## factor(provider_name)Advanced Foot Ankle Specialists
## (628.888)
##
## factor(provider_name)Afc Urgent Care 55.596
## (480.600)
##
## factor(provider_name)Affiliates In Podiatry 113.771
## (578.877)
##
## factor(provider_name)Alice Peck Day Memorial Hospital 100.776
## (213.038)
##
## factor(provider_name)American Medical Imaging -65.061
## (970.691)
##
## factor(provider_name)Andrea M Dionne, DO 119.255
## (462.165)
##
## factor(provider_name)Androscoggin Valley Hospital 218.156
## (212.088)
##
## factor(provider_name)Anna Jaques Hospital 78.659
## (204.357)
##
## factor(provider_name)Appledore Medical Group 198.241
## (799.330)
##
## factor(provider_name)Associates In Orthopedics -65.186
## (798.647)
##
## factor(provider_name)Atlantic Orthopaedics -181.937
## (261.890)
##
## factor(provider_name)Atlantic Urology Associates 116.840
## (807.483)
##
## factor(provider_name)Bedford Ambulatory Surgical Center 407.195
## (251.310)
##
## factor(provider_name)Bedford Ambulatory Surgical Center Imaging 190.651
## (411.183)
##
## factor(provider_name)Bedford Commons OBGYN 55.884
## (312.075)
##
## factor(provider_name)Bedford Podiatry Group -197.454
## (628.888)
##
## factor(provider_name)Bedford Women's Care Associates 45.128
## (700.499)
##
## factor(provider_name)Bridgton Hospital 155.122
## (539.471)
##
## factor(provider_name)Capital Orthopaedic Surgery Center 978.382**
## (412.124)
##
## factor(provider_name)Carewell Urgent Care 20.081
## (971.445)
##
## factor(provider_name)Catholic Medical Center -39.540
## (202.134)
##
## factor(provider_name)Center For Diagnostic Imaging -130.578
## (581.334)
##
## factor(provider_name)Cheshire Medical Center -80.851
## (195.303)
##
## factor(provider_name)Circle Health Urgent Care -54.232
## (800.975)
##
## factor(provider_name)Concord Ambulatory Surgery Center -3.292
## (379.769)
##
## factor(provider_name)Concord Endoscopy Surgery Center -291.077
## (371.398)
##
## factor(provider_name)Concord Hospital 101.398
## (192.534)
##
## factor(provider_name)Concord Imaging Center 170.576
## (275.288)
##
## factor(provider_name)Concord OBGYN 141.634
## (462.427)
##
## factor(provider_name)Concord Orthopaedics -115.187
## (228.674)
##
## factor(provider_name)Convenient MD -11.963
## (238.980)
##
## factor(provider_name)Coos County Family Health Services 328.392
## (970.014)
##
## factor(provider_name)Core Physicians 54.042
## (242.637)
##
## factor(provider_name)Cottage Hospital 72.260
## (228.493)
##
## factor(provider_name)Dartmouth-Hitchcock (Concord) 219.872
## (268.849)
##
## factor(provider_name)Dartmouth-Hitchcock (Keene) 429.733
## (276.934)
##
## factor(provider_name)Dartmouth-Hitchcock (Manchester) 211.822
## (270.597)
##
## factor(provider_name)Dartmouth-Hitchcock (Nashua) 256.210
## (269.532)
##
## factor(provider_name)Dartmouth-Hitchcock (Walpole) 331.490
## (970.014)
##
## factor(provider_name)Dartmouth-Hitchcock Clinic 22.214
## (640.544)
##
## factor(provider_name)Dartmouth-Hitchcock Medical Center 173.054
## (334.609)
##
## factor(provider_name)Derry Imaging Center 22.400
## (256.710)
##
## factor(provider_name)Derry Medical Center 203.060
## (799.330)
##
## factor(provider_name)Dover Foot 22.629
## (628.888)
##
## factor(provider_name)Dover Women's Health 104.608
## (330.922)
##
## factor(provider_name)Elliot Hospital 279.775
## (186.214)
##
## factor(provider_name)Elliot One-Day Surgery Center 671.973*
## (347.279)
##
## factor(provider_name)Elliot Physician Network 205.994
## (698.411)
##
## factor(provider_name)Essex Orthopaedics Sports Medicine
## (246.816)
##
## factor(provider_name)Exeter Hospital 253.947
## (187.787)
##
## factor(provider_name)ExpressmedExpressmed -75.280
## (700.295)
##
## factor(provider_name)Feminist Health Center of Portsmouth 250.980
## (700.499)
##
## factor(provider_name)Foot Health Center of Merrimack Valley 250.244
## (578.877)
##
## factor(provider_name)Foundation Medical Partners 55.296
## (257.124)
##
## factor(provider_name)Four Seasons Imaging -230.259
## (367.559)
##
## factor(provider_name)Franklin Regional Hospital 86.652
## (236.075)
##
## factor(provider_name)Frisbie Memorial Hospital -66.396
## (204.172)
##
## factor(provider_name)Garrison Women's Health Center 78.004
## (330.448)
##
## factor(provider_name)Granite State Podiatry Associates -214.736
## (578.877)
##
## factor(provider_name)Greater Salem Family Footcare Associates 487.375
## (697.256)
##
## factor(provider_name)Gregory Mcnamara, Dpm 65.963
## (697.369)
##
## factor(provider_name)Harbour Women's Health 53.081
## (341.727)
##
## factor(provider_name)HealthstopHealthstop -214.067
## (969.681)
##
## factor(provider_name)Hillside Surgery Center 1,289.141***
## (491.935)
##
## factor(provider_name)Huggins Hospital 104.918
## (210.975)
##
## factor(provider_name)Joseph A Misiewicz, MD 159.945
## (799.242)
##
## factor(provider_name)Keady Family Practice 179.681
## (799.242)
##
## factor(provider_name)Krislan of New England -2.815
## (378.855)
##
## factor(provider_name)Kristin Visco, Dpm Aacfas -22.498
## (697.253)
##
## factor(provider_name)Laconia Clinic 872.474
## (800.580)
##
## factor(provider_name)Lahey Health 78.792
## (257.369)
##
## factor(provider_name)Lakes Region General Healthcare 64.310
## (195.339)
##
## factor(provider_name)Lawrence General Hospital 125.752
## (219.934)
##
## factor(provider_name)Littleton Regional Healthcare 278.019
## (204.120)
##
## factor(provider_name)Lowell General Hospital 174.689
## (213.646)
##
## factor(provider_name)LRGHealthcareLRGHealthcare 180.254
## (270.292)
##
## factor(provider_name)Maine Health -52.777
## (970.142)
##
## factor(provider_name)Manchester Community Health Center 72.541
## (801.135)
##
## factor(provider_name)Manchester Obstetrical Associates 5.121
## (321.142)
##
## factor(provider_name)Manchester Urology Associates 62.453
## (591.508)
##
## factor(provider_name)Martin's Point Health Care 89.447
## (580.142)
##
## factor(provider_name)Mary Hitchcock Memorial Hospital 266.633
## (187.414)
##
## factor(provider_name)Mary Jo Montanarella, MD 90.049
## (428.848)
##
## factor(provider_name)Medexpress Urgent Care - Massachusetts -57.541
## (627.670)
##
## factor(provider_name)Memorial Hospital 105.179
## (200.484)
##
## factor(provider_name)Merrimack Valley Endoscopy Center -5.107
## (427.710)
##
## factor(provider_name)Merrimack Valley Orthopaedic Associates 211.956
## (439.060)
##
## factor(provider_name)MID-STATE Health Center 298.329
## (799.242)
##
## factor(provider_name)Monadnock Community Hospital 303.340
## (200.205)
##
## factor(provider_name)Monadnock OBGYN Associates 156.161
## (348.330)
##
## factor(provider_name)New England Foot Ankle
## (578.877)
##
## factor(provider_name)New England Institute of Urology 490.364
## (807.514)
##
## factor(provider_name)New Hampshire Neurospine Institute -90.249
## (345.750)
##
## factor(provider_name)New Hampshire Orthopaedic Center 12.541
## (221.870)
##
## factor(provider_name)New London Hospital 101.696
## (215.584)
##
## factor(provider_name)Northeast Endoscopy Center -216.533
## (413.491)
##
## factor(provider_name)Northeast Surgery Care of Newington 4,540.741***
## (986.204)
##
## factor(provider_name)Northeast Urologic Surgery 413.887
## (591.508)
##
## factor(provider_name)Northeastern Vermont Regional Hospital 292.626
## (398.996)
##
## factor(provider_name)Orchard Surgical Center 929.110***
## (336.714)
##
## factor(provider_name)Orthopaedic Surgical Associates -48.961
## (280.044)
##
## factor(provider_name)Orthopaedics Northeast -14.906
## (310.947)
##
## factor(provider_name)Orthopedic Surgery Center Derry 1,273.009***
## (471.816)
##
## factor(provider_name)Parkland Medical Center -6.886
## (200.110)
##
## factor(provider_name)Partners For Women's Health 30.895
## (325.620)
##
## factor(provider_name)Portsmouth Ambulatory Surgery Center 1,056.275***
## (327.283)
##
## factor(provider_name)Portsmouth Foot Ankle
## (578.877)
##
## factor(provider_name)Portsmouth Regional Hospital 173.729
## (195.412)
##
## factor(provider_name)Seacoast Orthopedics Sports Medicine
## (231.235)
##
## factor(provider_name)Shields Imaging -57.297
## (317.441)
##
## factor(provider_name)Southern New Hampshire Internal Medicine Associates -156.692
## (697.256)
##
## factor(provider_name)Southern NH Medical Center 77.755
## (187.195)
##
## factor(provider_name)Speare Memorial Hospital 167.443
## (198.062)
##
## factor(provider_name)Springfield Medical Care System 272.604
## (233.858)
##
## factor(provider_name)St. Joseph Hospital 136.401
## (189.749)
##
## factor(provider_name)St. Joseph's Physician Services 240.892
## (507.460)
##
## factor(provider_name)Steward Medical Group 74.341
## (195.680)
##
## factor(provider_name)Stratham Ambulatory Surgery Center (paradigm ) -245.354
## (362.682)
##
## factor(provider_name)Tamworth Family Practice 237.857
## (970.014)
##
## factor(provider_name)The Surgery Center of Greater Nashua 45.981
## (371.484)
##
## factor(provider_name)Thomas Vaill King, MD -82.818
## (423.473)
##
## factor(provider_name)Upper Connecticut Valley Hospital 180.229
## (236.664)
##
## factor(provider_name)Valley Regional Hospital 92.613
## (213.852)
##
## factor(provider_name)Veterans Administration Medical Center 267.035
## (256.121)
##
## factor(provider_name)Weeks Medical Center 25.871
## (220.245)
##
## factor(provider_name)Wentworth Douglass Physician Corp 160.879
## (698.339)
##
## factor(provider_name)Wentworth Surgery Center -383.037
## (317.854)
##
## factor(provider_name)Wentworth-Douglass Hospital 468.420**
## (197.791)
##
## factor(provider_name)William Albert Selleck, MD -14.406
## (640.544)
##
## factor(provider_name)Women's Life Imaging 169.824
## (443.657)
##
## factor(provider_name)York Hospital 194.733
## (200.762)
##
## factor(procedure)Arthroscopic Shoulder Surgery 1,448.218***
## (242.094)
##
## factor(procedure)Bone Density Scan (outpatient) 11,142.120***
## (219.817)
##
## factor(procedure)Colonoscopy with biopsy (outpatient) 499.802**
## (195.174)
##
## factor(procedure)Colonoscopy with polyp removal (outpatient) 395.841**
## (198.396)
##
## factor(procedure)CT - Abdomen Pelvis, with contrast
## (204.190)
##
## factor(procedure)CT - Chest (outpatient) -113.307
## (214.483)
##
## factor(procedure)CT - Head&Brain, without dye -5.878
## (232.366)
##
## factor(procedure)Diagnostic colonoscopy (outpatient) 394.761**
## (189.789)
##
## factor(procedure)Emergency Department Visit - Low Complexity (outpatient) -136.666
## (195.667)
##
## factor(procedure)Emergency Room Visit - Medium (outpatient) 3,623.262***
## (219.578)
##
## factor(procedure)Mammogram (outpatient) -380.151**
## (190.175)
##
## factor(procedure)MRI - Back (outpatient) -134.316
## (198.815)
##
## factor(procedure)MRI - Brain (outpatient) -122.942
## (206.533)
##
## factor(procedure)MRI - Knee (outpatient) -186.469
## (198.575)
##
## factor(procedure)MRI - Pelvis (outpatient) -230.501
## (256.891)
##
## factor(procedure)MRI - Shoulder, Elbow, or Wrist -150.837
## (199.824)
##
## factor(procedure)Myocardial Imaging (outpatient) -101.114
## (220.333)
##
## factor(procedure)Tonsillectomy with Adenoidectomy (outpatient) 549.503*
## (291.163)
##
## factor(procedure)Ultrasound - Abdominal, Complete -305.413
## (202.213)
##
## factor(procedure)Ultrasound - Abdominal, Limited -310.059
## (203.154)
##
## factor(procedure)Ultrasound - Breast (outpatient) -161.894
## (204.398)
##
## factor(procedure)Ultrasound - Head and Neck -365.610*
## (201.577)
##
## factor(procedure)Ultrasound - Pelvic (outpatient) -370.230
## (225.112)
##
## factor(procedure)Ultrasound - Pregnancy (outpatient) -476.534**
## (203.749)
##
## factor(procedure)Ultrasound - Pregnancy follow-up -449.266**
## (201.791)
##
## factor(procedure)Ultrasound - Transvaginal (non-maternity) -377.086*
## (198.140)
##
## factor(procedure)Upper Gastrointestinal Endoscopy, with biopsy 1,931.618***
## (291.163)
##
## factor(procedure)Urine Capacity Measurement 665.530***
## (222.240)
##
## factor(procedure)X-Ray - Abdomen 112.382
## (208.026)
##
## factor(procedure)X-Ray - Ankle (outpatient) 19.034
## (195.806)
##
## factor(procedure)X-Ray - Chest (outpatient) 175.743
## (197.242)
##
## factor(procedure)X-Ray - Foot (outpatient) 125.984
## (190.884)
##
## factor(procedure)X-Ray - Hand 176.165
## (195.443)
##
## factor(procedure)X-Ray - Hip -44.817
## (194.155)
##
## factor(procedure)X-Ray - Knee (outpatient) 44.131
## (193.561)
##
## factor(procedure)X-Ray - Middle Back (Spine, Thoracic) 146.447
## (244.176)
##
## factor(procedure)X-Ray - Neck (Spine, Cervical) -17.300
## (214.772)
##
## factor(procedure)X-Ray - Pelvis 99.632
## (242.439)
##
## factor(procedure)X-Ray - Shoulder (outpatient) 200.820
## (192.573)
##
## factor(procedure)X-Ray - Spine (outpatient) 106.964
## (195.633)
##
## factor(procedure)X-Ray - Wrist (outpatient) 16.421
## (199.566)
##
## Constant 447.030*
## (235.584)
##
## -----------------------------------------------------------------------------------------------------
## Observations 6,002
## R2 0.527
## Adjusted R2 0.513
## Residual Std. Error 1,346.101 (df = 5826)
## F Statistic 37.127*** (df = 175; 5826)
## =====================================================================================================
## Note: *p<0.1; **p<0.05; ***p<0.01